Should Pension Savings Fund First Time Buyer Deposits?
The current Ministry of Housing, Communities and Local Government Secretary, James Brokenshire, has claimed that first-time buyers (FTBs) should be permitted to use their pension pot to help fund the deposit needed to buy their first home.
As we are days away from announcing the new leader of the Conservative Party and Prime Minister of the United Kingdom, all members of the party’s upper echelons are announcing their ideas to improve the UK, even those that are not standing for leadership.
The innovative idea may be a way of highlighting his worth for the next leader when the inevitable cabinet reshuffle takes place, but Brokenshire has highlighted a clear issue with the housing market that continues to remain a stumbling block for many.
Rising house prices and static wage growth in recent years has created an affordability issue for the majority trying to get on the housing market. Earlier this week, the company Verismart disclosed data suggesting that by 2039, 50.7% of the population will be privately renting because they have been unable to save the necessary funds to become an owner occupier.
Brokenshire believes that exploiting some of the money that has been saved in private pension schemes would help the millions of people getting dragged into a life of indefinite rent. It could also help retirees in the long run as they should have a layer of equity they could use in their golden years.
Currently, anyone looking to withdraw money from their pension before the minimum pension freedom age of 55 faces up to a 55% Government tax. Additionally, most Financial Conduct Authority (FCA) regulated members would be unwilling to help someone trying to withdraw from their pension savings. With some unregulated firms charging excessive percentages to free up the money, people desperate enough to withdraw pension money early could end up with a tiny percentage of their total pension pot.
Brokenshire was clear that offering money saved for retirement could allow more young people to buy their first home and gain a foothold on the property ladder with other research indicating that the average pension saving is unlikely to be enough to live on in later life.
Whilst it may reduce the amount of money available to a person in their retirement, a large number of younger home owners already feel as though the wealth accumulated in their property will need to be used to fund their retirement.
According to a new study by Canada Life Home Finance, 9% of 16 to 54-year olds predict that their property and the equity accumulated in it will need to be used as the main source of their income in retirement; a statistic which is three times higher than those over the age of 55.
Only around half of respondents, under the age of 55, thought that their state and work-based pensions will provide them with enough to live on in their retirement.
Furthermore, little over a fifth (21%) believe their savings will supplement a drop in income during retirement.
An Equity Release Supermarket survey of over 4,000 people aged over 40-years-old found that 80% of the respondents under the age of 60 were oblivious to how much money they would need to live on in their retirement.
The overwhelming sentiment amongst respondents overall was pessimistic, resigned to living a slightly worse existence once they stop working. Over half (51%) believed that their disposable income would drastically decrease once they enter their retirement years with a third of respondents anxious that their standard of living will deteriorate in their golden years.
In part, these feelings are exacerbated by the belief that 6% feel they may not ever be able to retire. Additionally, 12% of people over the age of 70-years-old have been unable to retire as they do not have the necessary savings or pension to finance it.
Only 29% of respondents felt that they had planned to supplement their state pension with a private pension or savings.
As people live longer, this means that those unprepared for retirement will be forced to rely on the equity in their home to supplement their retirement.
Housing Minister James Brokenshire, Secretary for Housing, Communities and Local Government, commented:
“We should be looking at allowing an individual to use part of their pension pot as a deposit on a first-time home purchase.
“We should be changing the necessary regulations to allow this to happen, protecting the integrity of pension investments but allowing lenders to innovate and design new products to bring this opportunity to consumers.”
Alice Watson, Head of Marketing and Communications at Canada Life Home Finance, commented:
“It is good that the younger generation recognises that they can unlock wealth from their property in retirement. This openness is likely driven by the reality that many under 50s will receive less generous pensions under the defined contribution scheme, compared to the majority of the older generation on the defined benefit plan.
“Following the pension freedoms, there is a growing fear that people’s retirement income might not be able to provide them with the sort of lifestyle they’re hoping for. However, there is a range of equity release products that can help customers enjoy their later life, from helping clear existing debts to funding lifestyle enhancements.”
Should the government amend pension policies to help first-time buyers easily withdraw the money needed to fund a deposit?